Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries

The Balassa-Samuelson model, which explains real exchange rate movements in terms of sectoral productivities, rests on two components. First, for a class of technologies including Cobb-Douglas, the model implies that the relative price of nontraded goods in each country should reflect the relative productivity of labor in the traded and nontraded goods sectors. Second, the model assumes that purchasing power parity holds for traded goods in the long-run. We test each of these implications using data from a panel of OECD countries. Our results suggest that the first of these two fits the data quite well. In the long run, relative prices generally reflect relative labor productivities. The evidence on purchasing power parity in traded goods is considerably less favorable. When we look at US dollar exchange rates, PPP does not appear to hold for traded goods, even in the long run. On the other hand, when we look at DM exchange rates purchasing power parity appears to be a somewhat better characterization of traded goods prices.

How Do Monetary and Fiscal Policy Interact in the European Monetary Union?

Formation of the Euro area raises new questions about the coordination of monetary and fiscal policy. Using a New Neoclassical Synthesis (NNS) model, we show that a common monetary policy, responding to area-wide aggregates, has asymmetric effects on countries within the union, depending on whether they are large or small, or whether they have high or low debts. We analyze the implications of these asymmetries for the various countries welfare and for their fiscal policies. We also study rules for setting national tax and spending rates, rules that constrain movements in the deficit to GDP ratio. We ask whether these rules are necessary for the common monetary policy to be able to harmonize national inflation rates, and we analyze their effects on national welfare. We also discuss some potential failings of our model (and perhaps NNS models generally); in particular, our model's variance decompositions suggest that productivity shocks may play an inordinately large role, while fiscal shocks (or demand shocks generally) may play too small a role (even when 'rule of thumb' spenders are added).

The Need for International Policy Coordination: What's Old, What's New, What's Yet to Come?

Fifty years ago, the Chicago School argued that flexible exchange rates would insulate employment from foreign economic disturbances: there is no need for policy coordination; flexible exchange rates suffice. Twenty five years later, the Bretton Woods system was gone, and the first generation of policy coordination models was introduced. Chicago School arguments not withstanding, these Old-Keynesian models provided a theoretical rational for policy coordination. Now, a new generation of policy coordination models is emerging. These New-Keynesian models incorporate optimizing households, monopolistic competition and nominal inertia. Here, we examine macroeconomic interdependence and the scope for policy coordination in a tractable second generation model that has received much recent attention. We relate our discussion to the old Chicago School arguments, to earlier analyses of first generation models, to recent empirical work on productivity, and to recent theoretical work on closed economy models. We conclude that second generation models may have more scope for policy coordination than did the first, and we identify the empirical work that is needed to give a serious answer to the question.

Price- and wage- inflation targeting: variations on a theme by Erceg, Henderson, and Levin

Inflation (Finance) ; Prices ; Wages

Trends in European productivity and real exchange rates

Durante la ultima decada se ha producido una disminucion sustancial de la tasa de inflacion en paises como España o Italia. Sin embargo, dicho comportamiento esconde un fenomeno de inflacion dual: la tasa de crecimiento de los precios en el sector de bienes no comerciables se ha situado de forma persistente por encima de la tasa en el sector de bienes comerciables. En este trabajo se ofrece una explicacion parcial de dicha divergencia en terminos de las diferencias existentes en la evolucion tendencial de la productividad del trabajo en ambos sectores. En concreto, la evidencia apunta a un menor crecimiento de la productividad en el sector de bienes no comerciables, lo que explicaria su mayor inflacion relativa como un fenomeno de equilibrio. A partir de esta interpretacion de los hechos se investigan sus consecuencias sobre el cumplimiento de los criterios de Maastricht, asi como sobre la posible existencia de diferenciales nacionales de inflacion despues de la formacion de la Union Monetaria Europea (UME). (mc) (bd) (ge) (mac

Do exchange rates move to address international macroeconomic imbalances?

Este trabajo aporta evidencia empirica sobre la efectividad de los movimientos en los tipos de cambio nominales para suavizar los desequilibrios ciclicos entre paises, como se concluye de la literatura de areas monetarias optimas. Utilizando las restricciones del modelo MundellÖFleming (en el cual se basa la teoria de areas monetarias optimas), se identifican sistemas VAR que explican los movimientos del tipo de cambio y del output relativo entre los paises potenciales de la Union Monetaria Europea (UME). Encontramos que los shocks que causan la mayor parte de la variacion en el output relativo no causan la mayor parte de la variacion en el tipo de cambio. Estos resultados hacen dificil defender que la perdida de flexibilidad en el tipo de cambio que acompaña a la IME supondria un coste significativo para la estabilidad macroeconomica. Incluye graficos, cuadros y bibliografia. (mbc) (jvl) (jvi) (mac